Investment and the interest rate The chapter argues that investment depends negatively on the interest rate because an increase in the cost of borrowing discourages investment. However, firms often finance their investment projects using their own funds.

If a firm is considering using its own funds (rather than borrowing) to finance investment projects, will higher interest rates discourage the firm from undertaking these projects? Explain. ( Think of yourself as the owner of a firm that has earned profits and imagine that you are going to use the profits either to finance new investment projects or to buy bonds. Will your decision to invest in new projects in your firm be affected by the interest rate?)